The proposed changes will clarify and update the current standards and aim to ensure that pension scheme members considering a transfer are given a fair assessment of what they will receive in retirement.
A pension transfer is where a pension is moved from a defined benefit scheme (such as a final salary pension scheme) to a personal pension scheme. On retirement, retirees can convert a personal pension fund into an annuity or draw money from the fund, known as income drawdown, to provide regular payments.
Current FSA rules already set out how to calculate the benefits of a transfer that will be given up when members transfer to a personal pension; this is a process called transfer value analysis.
The TVA process compares the pension benefits from the DB scheme with those that could be provided by the personal pension scheme. The FSA believes TVA is a complex process and requires the full facts to be presented to the member before any action is taken. The starting point is always that a transfer will not be in the client’s best interests.
The FSA is proposing changes to ensure that the assumptions advisers use for the comparison are applied consistently by all firms, take account of recent UK and EU legislation, and use reasonable growth rates for illustrating the results of the comparison to the member.
To ensure that TVA is carried out with a member’s best interests central to any decision, the FSA is proposing:
- to update the rules for calculating mortality to be aligned with those used by the Board for Actuarial Standards, and therefore making them consistent with annual pension statements that all personal pension holders receive once a year;
- to calculate annuities on a gender-equal mortality rate, in line with the European Court of Justice’s decision in March 2011;
- to introduce a Consumer Price Index (CPI) assumption for re-valuing pensions in deferment, reflecting legislative changes made by the government in 2011;
- to require CPI-linked benefits to be valued using the Retail Price Index (RPI)-linked annuity interest rate;
- that Limited Price Indexation (LPI) annuities will be valued on the same assumptions as RPI-linked annuities; and
- that the comparison provided to the member is illustrated on growth rates that take into account the likely returns of the pension fund assets as well as the transfer of risk from the DB scheme to the member.
The FSA estimates that the changes to the way TVAs are performed will prevent an undervaluation of benefits of up to £20bn. In other words, the changes mean that transfer values may have to increase before an adviser recommends a transfer.
Sheila Nicoll, the FSA’s director of conduct policy, said:
“It is vital that employees get a fair deal as more and more employers are looking to reduce liabilities by offering members of defined benefit schemes a move to a personal pension.
“As things stand, there is a high risk members receive unsuitable advice as a result of the mechanistic approach to analysing transfer values taken by some advisers. These changes are important to make sure that members’ interests are at the centre of any decision to transfer and that any advice to transfer is suitable.
“We have seen examples of advisory firms recommending a transfer when there is little or no justification to do so, or where the reasons given for an individual to transfer have nothing to do with their particular circumstances.
“We are not saying that every transfer exercise is bad and we recognise that there will be some people, albeit a small minority, who can benefit from such a move – but they must all be treated fairly.”
The consultation period closes on 27 March 2012 and the FSA is inviting interested parties to respond to create a comprehensive debate.
